Jyoti CNC Automation IPO: should you invest?

The initial public offering (IPO) of Rajkot-based CNC machine supplier Jyoti CNC Automation will remain open till January 11, 2024. The total offer is worth around ₹1,000 crore which is entirely fresh issue. The proceeds from the issue will be utilised for pre/repayment of debt (₹475 crore), funding long-term capital requirements (₹360 crore) and general corporate purposes. 

The price band of the issue has been set in the range of ₹315 to ₹331 per share. At the upper end, the company’s market cap comes to around ₹7,527 crore. Post-issue, the promoter shareholding will come down from 72 per cent to 62 per cent. 

Here are five things to know about the IPO.

1. Business

Jyoti CNC Automation is engaged in the business of manufacturing metal cutting ‘computer numerical control’ (CNC) machines. CNC machining can produce a broad range of metal components which are used across many industries due to their accurate, consistent and complex cuts by way of computer program as against lathe where manual intervention is high. The company supply a range of CNC machines, including CNC Turning Centers, Vertical Machining Centers and Horizontal Machining Centers.

The company derives its revenue from industries such as auto and auto components (47 per cent), aerospace and defence (20 per cent), general engineering (20 per cent), dies and moulds (9 per cent) and others such as electronic manufacturing services (EMS).

The company has a wide customer base, including companies/organisations such as ISRO, Uniparts India Limited, Tata Advanced System, Bharat Forge, Omnitech Engineering, Harsha Engineers, Bosch Limited, and Aequs Private Limited.

The company procures primary raw materials such as pig iron, cold rolled steel sheets, scrap iron and electric panel from domestic and overseas suppliers, while it manufactures certain key components such as CNC controllers, motors, linear guide ways and ball screws in-house.

2. Strengths

The company is a prominent manufacturer of simultaneous 5-Axis CNC machines in India and has a diverse portfolio of CNC machines. It also operates through its France based step-down subsidiary, Huron Graffenstaden SAS, providing the company an access to a diverse global customer base, across aerospace, defence and other high end engineering application industries.

The company has vertically integrated operations which enables customisation and product efficiencies as its manufacturing facilities are equipped with capabilities to design, develop and manufacture its product portfolio. The company can manufacture some of the critical machine components in-house such as spindles, tool-changers, pallet changers, rotary tables and universal heads.

Traditionally, India has been importing CNC machines. However, the scenario appears to be changing as the imports have reduced from 66 per cent in 2010 to 40 per cent in 2023, per Frost & Sullivan research. According to the management, the company is well placed to tap the opportunities due to import substitution and thus, increase its market share in Indian CNC market from the current levels of 10 per cent.

3. Risks

While the company has been maintaining long-term business relationships with certain customers, it doesn’t have long-term contracts with any company and thereby they don’t have repeat orders on an annual or bi-annual basis. Absence of long-term contracts might affect revenue visibility for the company. Also, the company source input materials on a spot basis which exposes it to volatility in prices and supply challenges.

The company operates in a highly competitive environment and the industry is fragmented both domestically and globally with a wide range of small, medium, and big players. In India, the company competes with Bharat Fritz Werner, Ace Micromatic, Makino, HMT and Lokesh Machines.

4. Financials and valuation

The company has grown its operating revenue at a CAGR of around 27 per cent to ₹746 crore during FY21-23. This was driven by normalisation in business activities post Covid and a surge in capital expenditure cycle, helping the company to increase its revenues from sale of machinery.

During this period, its EBITDA increased at 75 per cent CAGR to ₹97 crore with EBITDA margin expanding to around 11 per cent in FY23 from 6 per cent in FY21. The expansion was on account of operating leverage driven by higher capacity utilisation, per the management.

However, the company has made losses at the net level during FY21-23, driven by losses in its foreign based step-down subsidiary Huron Graffenstaden primarily due to elevated finance costs (₹90 crore in FY23) and long working capital cycle. The losses declined from around ₹70 in FY21 to ₹15 crore in FY23 and the company reported a profit of around ₹3.3 crore in H1 FY24.

The company is having significantly high leverage with borrowings of around ₹821 crore leading D/E of 3.25 times and debt-service coverage ratio of less than one. Such a scenario has led to elevated finance costs for the company contributing to its losses.

Considering annualised H1 FY24 earnings (consolidated), the company is trading at an expensive P/E of 231 times. While one might argue that such an expensive P/E might be the result of the company turning from loss to profits, it is still expensive considering the EV/EBITDA metric.

Its EV/EBITDA (H1 FY24) of around 56 times compares to a range of 22-46 times for its listed peers in the broader machine tools segment such as Elgi Equipments, TD Power Systems, Macpower CNC, Triveni Turbine and Lakshmi Machine Works.    

5. What you should do?

The company benefits from its strong presence in the Indian CNC market with 10 per cent share and order book of around ₹3,315 crore. However, its  financials and high valuation don’t inspire much confidence now. While the company can bring down its debt through IPO which can lead to reduction in its finance costs, it needs to be monitored how the company can deliver in terms of profitability post listing.

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